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Japan's carbon neutrality goal could be more bane than boon for banks


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Japan's carbon neutrality goal could be more bane than boon for banks

Japanese banks' long road to regain profit momentum could be complicated by the nation's tall order to achieve carbon neutrality by 2050, a policy that will require years of significant financing of experimental projects and nationwide industrial transformation, analysts say.

The world's third-largest economy is adding hydrogen and ammonia to the energy mix, with a target of generating 10% of the nation's power by 2050, according to Japan's latest energy roadmap unveiled Dec. 25, 2020. Renewables are expected to power between 50% and 60% of the nation's electricity, up from 18% currently, while fossil fuel and nuclear power will meet the remaining 30% to 40% energy needs, down from more than 80% currently.

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While this goal will create new demand for loans, lenders will likely be exposed to more execution and market risks of green projects — especially the hydrogen projects, as some of them may take a long time to achieve commercial viability or even fail at some point, analysts say.

The loan yields are also likely lower than other types of corporate lending due to the policy push, which will be adding to a long list of challenges facing Japanese banks that have already been hit by ultra-low interest rates, thinning margins and sluggish loan growth for years, analysts add.

"I don't think they [banks] will earn a healthy return from green financing," Nana Otsuki, chief analyst at Monex Inc. "But they may have to push themselves to do it" to appeal to increasingly environment-conscious investors and support their share prices, she added.

The three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — have tentatively earmarked a total of 30 trillion loans for green projects over the next decade, according to the banks' statements. Among the funds earmarked, 12 trillion will be from Mizuho, 10 trillion from Sumitomo and 8 trillion from MUFG. In the last fiscal year ended in March 2020 alone, Mizuho provided 1.1 trillion in green financing. Two other megabanks did not disclose such figures.

As of Sept. 30, 2020, the three banks had combined outstanding loans totaling 276.2 trillion.

"If you ask if there is any risk in pursuing new projects, yes, risks are everywhere," a spokesperson from Mizuho told S&P Global Market Intelligence, referring to projects pertaining to the new emissions goal.

Banking on hydrogen

"Hydrogen will be a key technology to achieve the carbon neutrality," Japan's trade and industry ministry said Dec. 25, 2020. The ministry pointed out, however, that reducing the cost of hydrogen — which is now several times as expensive as natural gas — by increasing demand and procuring a significant amount of hydrogen is a must to make it a crucial alternative fuel in the future.

Japan is behind major economies such as Europe and China in developing commercial trucks that run on hydrogen-used fuel cell, while the electricity industry has not even entered an experimental stage of generating power from hydrogen. One of the targets in the energy roadmap is to consume about 20 million tons of hydrogen in 2050, approximately 10 times the current usage, which will require commercial trucks to run on hydrogen-used fuel cell on a commercialized scale and hydrogen-fueled power to be generated at plants.

The megabanks joined more than 80 Japanese companies across industries in launching Japan Hydrogen Association in December 2020. The association will seek to nurture demand for clean energy source from industries such as autos, electric power and steel.

Another area of investment would be carbon capture. How and where emitted carbon will be stored underground is uncertain for now, however, as Japan has a dearth of land for such use, said Takeo Kikkawa, a professor of the graduate school of international management at the International University of Japan. The uncertain prospects for such projects will likely pose risk to lenders, he added. Kikkawa is a member of the energy committee at the trade and industry ministry.

Nationwide decarbonization will also "require industries to make a fundamental change in their business models or strategies," the trade and industry ministry added. The auto industry will need to promote electric or fuel-cell powered vehicles, shifting from gasoline-powered ones, a shift that will likely involve changes to the supply chain of parts.

Green programs that rely on technological breakthroughs may also face the risk of a failure, said Takahide Kiuchi, executive economist at Nomura Research Institute.

"Achieving the 2050 carbon neutrality will be extremely challenging," Keidanren, the biggest Japanese business lobbying group, said in a statement in December 2020.

As of Jan. 19, US$1 was equivalent to ¥103.89.